Economists expect inflation to ease in September, but remain significantly higher than BoC target

Economists expect inflation will ease for a third straight month in September, but still remain significantly higher than the Bank of Canada’s two per cent target.

The median estimate from economists tracked by Bloomberg is for a 6.8 per cent year-over-year increase to Canada’s consumer price index (CPI) during September. In August, Statistics Canada reported inflation rose seven per cent on a year-over-year basis, which was down from 7.6 per cent in July.

“We expect that a CPI to be a little changed in September, and the yearly rate to come down a couple more notches to 6.8 per cent,” said Sal Guatieri, director and senior economist at BMO Capital Markets, over the phone on Tuesday.

“So it would be moving in the right direction, and quite materially down from the four decade high of 8.1 per cent that we saw in June.”

 

‘THERE’S A LOT RIDING’ ON THIS REPORT

Guatieri said if core inflation data rose in September, then it “would be bad news for the Bank of Canada’s inflation outlook and the economy.”

“Essentially, that (CPI report) could make the difference between the Bank of Canada raising rates by 50 basis points on October 26, or a larger move of 75 basis points,” Guatieri said.

“So there’s a lot riding on this inflation report, and of course, the Bank of Canada has to continue to raising rates aggressively. That really puts the pushes the economy a step closer to not just a mild recession, which is what we anticipate, but something more standard as far as economic downturns go.”

 

EXPECTING A DROP IN SHELTER COSTS

Craig Alexander, chief economist and executive advisor at Deloitte Canada, said he thinks shelter costs fell in September, adding that it could help Canadian inflation ease faster than the U.S.

“The fact that we’re having a housing correction is going to bring down that component (shelter costs),” Alexander said over the phone on Tuesday.

“So while mortgage interest costs are rising, and that will be upward pressure on inflation, the homeowner replacement costs will actually be coming down.”

Alexander added that this is “something different about the way Canada measures inflation than in the United States.”

“It’s one of the reasons why Canadian inflation might come down a bit faster than in the United States, it’s the fact that the correction in Canadian housing will actually show up in inflation data.”

 

RISING FOOD COSTS

Many consumers will be paying close attention to food inflation data in the CPI report.

In August, Statistics Canada reported food prices rose at its fastest pace since 1981.

But Guatieri said Canadians shouldn’t expect food inflation to ease too much from the 10.9 per cent high that was reported in August.

He said the recent weakness of the loonie against the U.S. dollar, and droughts in the U.S. Midwest will place some upward pressure on food prices.

“I would not expect a whole lot of relief just yet,” Guatieri said.

“I think over time we will see food cost inflation moderate, especially if the economy weakens further as we anticipate over the next three or four quarters, but I would not expect a big move in September.”

 

POLICY HIKE ALREADY DECIDED

Alexander said regardless of CPI data release on Wednesday, he thinks the next Bank of Canada’s interest rate announcement has “already been largely decided.”

“The real question is beyond October 26, how much more does the Bank of Canada have to do? If inflation surprises on the downside, then the Bank of Canada and financial markets will start to think that maybe the peak in the tightening cycle will be lower,” Alexander said.

“Whereas if inflation surprises on the upside, and it’s proving stickier then the central bank had hoped, then there’s a risk that the Bank of Canada is going to continue tightening in the months ahead. But, the Bank of Canada has been very clear that it isn’t done raising interest rates just yet.”



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